ABT Global Inc. - A Division of Advanced Business Technologies

By VAUHINI VARA
May 15, 2007

A year ago, Mark Rose, general manager of procurement at Chevron Corp., used the oil company's own software and paid outsourcer Electronic Data Systems Corp. millions of dollars a year to manage its catalogs of products and services from suppliers. But when that system became too costly and ineffective, Mr. Rose turned to new software that he hadn't considered much before: a Web-based service.

To negotiate prices with suppliers, Chevron, San Ramon, Calif., used to have a complex process that involved sending emails back and forth with attached spreadsheets. At the time, Mr. Rose says, he didn't consider Web-based services because he worried that sending information over the Web could open the oil giant up to security troubles. But then he found a new service from Ketera Technologies Inc., Santa Clara, Calif., one of many Web-software start-ups that have attracted attention over the past 12 months. Using Ketera's software, Chevron's suppliers could input and make changes to pricing through the Ketera Web site, and Mr. Rose's staff could approve them and make tweaks on the Web site. "We're an energy company, not a software company," says Mr. Rose. "If we can free ourselves up to dabble less in software and more in oil we'll be in good shape." He adds he's now spending about a third of what he previously spent, but declined to give exact figures.

Like Chevron, businesses are turning to companies like Ketera that provide what is known as "software as a service." The sector sprouted up eight years ago, when former Oracle Corp. executive Marc Benioff launched Salesforce.com Inc., a start-up that let companies manage sales leads through a Web site. While companies typically had organized their relationships with customers using customized software installed on computers, Mr. Benioff's idea was to offer a no-frills online service that let companies make only minor tweaks. Such Web-based software required less investment in on-premise software and hardware, got up and running more quickly, and was easier to use.

Early on, that attracted mostly small businesses that weren't previously using any software at all and could easily justify trying this new approach. But larger companies stayed away, having invested in the late 1990s in traditional software from the likes of Oracle and SAP AG. Now that's changing, partly because of an accounting quirk. Companies are starting to get rid of their old software at a time when capital-expenditure budgets are tight. Traditional software and the hardware to run it are considered a capital expenditure. But Web-based services are typically sold as a subscription, which means corporate buyers can account for them as a maintenance expense, which falls into a different bucket. As a result, companies are turning to start-ups such as Ketera, LucidEra Inc. and Workday Inc. that are offering Web-based services for tasks like controlling spending and managing employees. Meanwhile, a handful of older software-as-a-service companies such as Taleo Corp. and RightNow Technologies Inc. have gone public; another, NetSuite Inc., is widely expected to try to do so.

Big software makers like SAP and Oracle are themselves ramping up efforts in the area. Google Inc. is even getting involved, with Web-based word-processing and spreadsheet services for businesses. Research firm Gartner Inc. calculates the world-wide market for software as a service will grow to $19.3 billion by 2011 from $6.3 billion last year. "We're seeing the slow, steady evolution of the technology," says Mr. Benioff of Salesforce.com, noting that Web-based services have gone beyond the sales and marketing services that Salesforce.com pioneered.

Some larger, risk-averse companies -- though still nervous about Web-based services -- are now trying them. That was the experience of Rhonda Stickley, director of recruiting and staffing at timber giant Weyerhaeuser Co., who began using a Web-based service for tracking hiring from Taleo two years ago. At the time, Weyerhaeuser, Federal Way, Wash., was about to embark on a hiring spree as many of its employees neared retirement. But its technology for tracking hires was outdated and clumsy, involving contractors to scan paper applications into a program from a big software company. Even so, when Ms. Stickley discovered Taleo's service, she wondered whether applicants' private information would be secure and if Taleo would be able to handle the surge of Weyerhaeuser applicants. She visited the Dublin, Calif., software company in 2005, toured its research-and-development center, and grilled its chief executive about everything from the company's emergency plans to its long-term strategy.

Ms. Stickley was satisfied when she heard Taleo was planning to add more Web-based human-resources services that she could later add and had security guarantees that more than satisfied the company's requirements. Now, she uses Taleo's service to solicit applications through the Web, which enter her system directly without any scanning required. Ms. Stickley stopped paying the eight human scanners she used to have and now doesn't have to worry about maintaining hardware or on-premise software. She says she's saving 10% to 12% by using the service, mostly from efficiency gains because the service is less of a hassle to manage and easier for job applicants to use than the software she had previously used.

One challenge that remains for users of Web-based services is that companies can't customize these services the way they could with traditional software. Mr. Rose of Chevron has had to tweak the way his company communicates with suppliers about prices to fit with how the Ketera service works.